Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, the industries in which we operate and other matters, as well as management's beliefs and assumptions and other statements regarding matters that are not historical facts. These statements include, in particular, statements about our plans, strategies and prospects. For example, when we use words such as "projects," "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," "should," "would," "could," "will," "opportunity," "potential" or "may," variations of such words or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our forward-looking statements are subject to risks and uncertainties. Factors that might cause actual results to differ materially, include, but are not limited to, our ability to obtain additional financing on acceptable terms or at all, our ability to continue to develop and expand our services business, our ability to expand and maintain a successful sales and marketing organization, continuation of favorable third-party payor coverage and reimbursement for tests performed by us, our ability to maintain compliance with financial and other covenants in our credit facilities, the reaction of third parties to our "going concern" audit opinion and the impact it may have on our operations, whether the conditions to payment of all or any portion of the $1.5 million of contingent consideration from the sale of our technology business to Carl Zeiss MicroImaging, Inc. are satisfied, unanticipated expenses or liabilities or other adverse events affecting cash flow, our ability to successfully develop and market novel markers, including the recently announced Clarient Insight™ Dx Breast Cancer Profile, uncertainty of success in developing any new software applications, failure to obtain Food and Drug Administration clearance or approval for particular applications, our ability to compete with other technologies and with emerging competitors in cell imaging and dependence on third parties for collaboration in developing new tests, and those risks which are discussed in "Risk Factors" below. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by this cautionary statement. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this report might not occur.

Overview and Outlook

Clarient, Inc., a Delaware corporation ("Clarient", the "Company", "we", "us" or "our"), was founded and organized in 1993 and is headquartered in Aliso Viejo, California. We are an advanced oncology diagnostics services company. Our vision is to improve the lives of those affected by cancer by bringing clarity to a complex disease. Our mission is to be the leader in cancer diagnostics by dedicating ourselves to collaborative relationships with the health care community as we translate cancer discovery and information into better patient care.

With the completion of the human genome project in the late 1990s, medical science has entered a new era of diagnostics that will move us closer than ever before to understanding the molecular causes for complex diseases, particularly cancer. As a result, the landscape of cancer management is undergoing significant change. There is now an escalating need for advanced oncology testing to provide physicians with necessary information on the cellular profile of a specific tumor, enabling them to select the most appropriate therapies. Significant business opportunities exist for companies, like Clarient, that execute strategies to extract value from this new environment. For this reason, we began performing under a new business plan in the third quarter of 2004 by launching a new business initiative-building a laboratory facility providing comprehensive services focused on cancer testing for both the clinical and research markets-to capitalize on the growth that is anticipated over the next five to ten years in the cancer diagnostics market.

In 2005, we changed our corporate name and completed the first stage of the transformation of our business from ChromaVision Medical Systems, Inc. (positioned as a medical device provider with a single application) to Clarient (positioned as a technology and services company offering a full menu of advanced tests to assess and characterize cancer). We gathered an experienced group of professionals from the anatomic pathology laboratory and the in-vitro diagnostics businesses to carefully guide this transition. We have achieved rapid growth by commercializing a set of services to provide the community pathologist with the latest in cancer diagnostic technology, anchored by our own proprietary image analysis technology and augmented by other key technologies. In June 2005, we kicked off the second stage of our business strategy when we signed a distribution and development agreement with Dako A/S ("Dako"), a Danish company recognized as a worldwide leader in pathology diagnostics systems. This enabled us to strengthen our legacy position as the leader in cellular

digital image analysis with the ACIS® Automated Image Analysis System ("ACIS") and accelerate our market penetration worldwide.

In 2006, we focused on the execution of our plan to capitalize on the growth of the cancer diagnostics market. We expanded on our base of immunohistochemistry ("IHC") with the addition of flow cytometry and fluorescent in situ hybridization ("FISH") molecular testing. These additions positioned Clarient to move beyond solid tumor testing into the important area of leukemia/lymphoma assessment. We also completed a consolidation of our business by moving into a state-of-the-art facility without disruption to our customers.

In March 2007, we entered the third stage of our business strategy by selling our instrument systems business, consisting of certain tangible assets, inventory, intellectual property (including the Company's patent portfolio and the ACIS and ChromaVision trademarks), contracts and other assets used in the operations of the instrument systems business (the "Technology business") to Carl Zeiss MicroImaging, Inc. ("Zeiss"), an international leader in the optical and opto-electronics industries (the "ACIS Sale"). The ACIS Sale provided us with additional financial resources to focus our efforts on the most profitable and fastest growing opportunities within our services business. We believe our strength as a leading cancer diagnostics laboratory, our strong commercial reach with cancer-focused pathologists, our unique PATHSiTE™ suite of services, our deep domain expertise and access to robust intellectual property can propel our continued growth through the development of additional tests, unique analytical capabilities and other service offerings.

Our focus is on identifying high-quality opportunities to increase our profitability and differentiate Clarient's service offerings in this highly competitive market. An important aspect of our strategy is to create near- and long-term, high margin revenue generating opportunities by connecting our medical expertise and our intellectual property with our strong commercial team to commercialize novel diagnostic tests (sometimes also referred to as "novel markers" or "biomarkers"), such as the Clarient Insight™ Dx Breast Cancer Profile which was announced in January 2008. Novel diagnostic tests detect characteristics of an individual's tumor or disease that, once identified and qualified, allow for more accurate prognosis, diagnosis and treatment. In addition, we are working to identify specific partners and technologies where we can assist in the commercialization of third-party novel diagnostic tests. We believe that broader discovery and use of novel diagnostic tests will clarify and simplify decisions for healthcare providers and the biopharmaceutical industry. The growing demand for personalized medicine has generated a need for these novel diagnostic tests, creating a new market expected to reach $1 billion in three to five years based on our internal estimates.

In 2008, we are focusing on four primary areas:

† Financial discipline to bring us closer to profitability;

† Leverage our commercial capability to launch new tests and maintain our revenue growth trajectory;

† Expand commercial reach to new customers, as well as capitalize on our expanded menu of additional testing for existing customers; and

† Strategic discipline to invest in high-value expansion opportunities to increase shareholder value.

Safeguard Scientifics, Inc. and certain of its subsidiaries own a majority of our outstanding capital stock. We refer to Safeguard Scientifics, Inc and/or its subsidiaries and affiliates, collectively, herein as "Safeguard."

Key indicators of our financial condition and operating performance

Our business is complex, and management is faced with several key challenges to reach profitability. We made the decision to provide in-house laboratory services in 2004 to give us an opportunity to capture a significant service- related revenue stream from the much broader and expanding cancer diagnostic testing marketplace. We have been experiencing revenue growth since the inception of this business line indicating successful execution of our sales plan and solid market acceptance of our service offerings. Management must manage the growth of this business, particularly the effects such growth has on our billings, collections and business processes. We have yet to reach optimal financial metrics related to cash flow and operating margins due to our limited history in providing lab services.

Selling, general and administrative (SG&A) expenses, including diagnostic services administration, for the three months ended March 31, 2008 were 63% of total revenue, compared to 79% in the prior quarter ended March 31, 2007. We expect an improving trend to continue as our revenues increase, offsetting our expenditures for: 1) selling expenses related to the ramp-up of our sales force responsible for our diagnostics services; 2) administration expenses related to diagnostic services, particularly the costs of pathology services and billing;
3) bad debt expenses primarily for uncollectible patient accounts; and
4) expenses in connection with key business development initiatives focused on targeted cancer therapies in various stages of clinical study.

Characteristics of our revenue and expenses

Revenue and Billing. Revenues are derived primarily from billing insurers, pathologists and patients for the diagnostic services that we provide.

Third-party billing. The majority of our revenue is currently generated from patients who utilize insurance coverage from Medicare or third-party insurance companies. In these situations, we bill an insurer that pays a portion of the amount billed based on several factors including the type of coverage (for example, HMO or PPO), whether the charges are considered to be in network or out of network, and the amount of any co-pays or deductibles that the patient may have at that time. The rates that are billed are typically a percentage of those amounts allowed by Medicare for the service provided as defined by Common Procedural Terminology (CPT) codes. The amounts that are paid to us are a function of the payors' practice for paying claims of these types and whether we have specific agreements in place with the payors. We also have a Medicare provider number that allows us to bill and collect from Medicare.

Laboratory services provided for patients with the assistance of automated image analysis technology are eligible for third -party reimbursement under well-established medical billing codes. These billing codes are known as Healthcare Common Procedure Coding Systems (HCPCS) codes and incorporate a coding system know as CPT codes. The billing codes are the means by which Medicare and private insurers identify certain medical services that are provided to patients in the United States. CPT codes are established by the American Medical Association (AMA). The Medicare reimbursement amounts are based on relative values, associated with the CPT codes, and are established by the Centers for Medicare & Medicaid Services (CMS) using a relative value system, with recommendations from the AMA's Relative Value Update Committee and professional societies representing the various medical specialties.

The following is a summary of Medicare reimbursement rates for certain CPT codes used in our laboratory services:

                  2007                  2008
CPT Code    (1/1/07-12/31/07)     (1/1/08-3/31/08)    Change

88185      $                41   $               52       27 %
88342                      107                  113        6 %
88361                      186                  186        -
88368                      193                  229       17 %
88367                      252                  269        7 %

The above CPT codes represent a significant portion of the Company's lab volume.

The current rates were approved for the first six months of 2008 and are subject to further adjustment as of July 1, 2008.

Client (pathologist) billing. In some situations, we establish direct billing arrangements with our clients where we bill them for an agreed amount per test for the services provided and the client will then handle all billing directly with the private payors. The amounts that may be charged to our clients is determined in accordance with applicable state and federal laws and regulations.

Patient billing. These billings can result from co-payment obligations, patient deductibles, circumstances where certain tests are not covered by insurance companies, and patients without any health insurance.

Cost of Revenue and Gross Margin. Cost of revenue includes laboratory personnel, depreciation of laboratory equipment, laboratory supplies and other direct costs such as shipping. Most of our cost of revenue structure is variable, except for staffing and related expenses, which are semi-variable, and depreciation, which is mostly fixed.

Selling, General and Administrative Expenses. Selling, general and administrative expenses primarily consist of the salaries, benefits and costs attributable to the support of our operations, such as: information systems, executive management, financial accounting, purchasing, administrative and human resources personnel, as well as office space and recruiting, legal, auditing and other professional services. Our current sales resources are targeting community pathology practices and hospitals. The sales process for this business group is designed to understand the customer's needs and develop appropriate solutions from our range of laboratory service options. In addition, we incur administration costs of senior medical staff, senior operations personnel, billing and collection costs, consultants and legal resources to facilitate implementation and support of our operations. Collection costs are incurred from a combination of in-house services and a third-party billing and collection company that we have engaged to perform these services because of the high degree of technical complexity and knowledge required to effectively perform these operations. These costs are generally incurred as a percentage of amounts collected. During 2008, the Company expects to complete the process of bringing the billing and collection process entirely in-house. The Company expects this will result in expense reductions in selling, general and administrative expense. Bad debt expense resulting primarily from uncollectible patient accounts is also a component of selling, general and administrative expenses.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities as of the dates of the balance sheets and revenues and expenses for the periods presented.

Management believes that the following estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective or complex judgments, resulting from the need to make estimates that are inherently uncertain.

Revenue Recognition

Revenue for our diagnostic services is recognized at the time of completion of services at amounts equal to the contractual rates allowed from third parties, including Medicare and insurance companies. These expected amounts are based both on Medicare allowable rates and on our collection experience with other third-party payors. Because of the requirements and nuances of billing for laboratory services, we generally invoice amounts that are greater than those allowable for payment. The differences between the amounts we bill and the amounts we expect to be paid are described as contractual discounts. We recognize revenue for the amount billed, net of these contractual discounts.

Allowance for Doubtful Accounts

For estimated bad debts, we review the age of receivables in various financial classes and estimate the uncollectible portion based on the type of payor, age of the receivables, and historical loss experience. However, in all years presented, we outsourced the direct billing and collection of laboratory related receivables, and we worked closely with our outsourced billing partner to review the details of each laboratory related account. As the Company continues to grow its laboratory service operations test volume, we expect bad debt expense to increase.

Long-Lived Assets and Accruals

We review our long-lived assets, such as fixed assets, for impairment whenever events or changes indicate the carrying value may not be recoverable or that the useful lives are no longer appropriate. If we determine that the carrying value of the long-lived assets may not be recoverable, the asset is then written down to its estimated fair value based on a discounted cash flow basis.

For other obligations requiring management's use of estimates, we review the basis for assumptions about future events and conditions, which are inherently subjective and uncertain. In determining whether a contingent liability should be accrued, management applies standards under Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," under which we accrue a contingent liability if the exposure is considered probable and reasonably estimable.

Three Months Ended March 31, 2008 Compared with Three Months Ended March 31, 2007

The following table presents our results of operations as percentages of revenues:

                                                Percentage of Revenue
                                                  Three months ended
                                                      March 31,
                                                  2008          2007
Revenue                                             100.0         100.0
Cost of revenue                                        38            57
Gross profit                                           62            43
Selling, general and administrative expenses           63            80
Loss from operations                                   (1 )         (37 )
Interest, net                                           5             9
Income from discontinued operations                     -            61
Net loss                                               (6 )          15

Revenue

Total revenue increased 80% or $7.1 million from $8.8 million for the three months ended March 31, 2007 to $15.9 million for the three months ended March 31, 2008. This increase resulted from the execution of our marketing and sales strategy to increase our sales to new and existing customers. We added 46 new customers in the three months ended March 31, 2008 and increased our penetration to existing customers during the period. In addition, we increased our breadth of offerings to include multiple cancer types, including expanding our lymphoma/leukemia business, and performing testing in other solid tumors such as colon, prostate and lung. This testing was performed using our expanded capabilities in immunohistochemistry, flow cytometry, FISH and PCR. We also increased our depth of offering within each cancer type. We also benefited from an overall increase in Medicare reimbursement rates in the first quarter of 2008, for certain tests we perform. In addition to the Medicare reimbursement rate increase, many of the Company's third-party contract rates are tied to Medicare rates, which consequently, also increased. We anticipate revenues will continue to increase as a result of increased revenue from existing customers, the addition of new customers and our offering of a more comprehensive suite of advanced and/or proprietary cancer diagnostic tests. However, current Medicare rates are only effective until June 30, 2008 and, if not made permanent prior to such date, will decrease to the rates in effect during the fourth quarter of 2007. If these Medicare reimbursement rates were to be reduced, such reduction would result in a reduced rate of revenue growth (though we anticipate that our overall revenues will continue to increase as a result of the other factors described above).

Cost of Revenue and Gross Margin

For the three months ended March 31, 2008, our gross margin was 62% compared to 43% in 2007. The increase in gross margin in 2008 was attributable to achieving economies of scale in our operations, a shift to more profitable tests, and the impact of the Medicare fee schedule increase noted above. We anticipate gross margins will continue at or near these levels as we more effectively utilize our capacity and expand our breadth of test offerings, subject to potential changes in Medicare rates . Since current Medicare rates are only effective until June 30, 2008, gross margins could decline if Medicare institutes a reduced fee schedule at that time.

Cost of revenue for the three months ended March 31, 2008 was $6.1 million compared to $5.1 million for March 31, 2007, an increase of 20%. These costs include costs associated with laboratory personnel, lab-related depreciation expense, laboratory reagents and supplies, the cost of tests performed by other laboratories, and other direct costs such as courier and shipping costs. As volume and revenue grows these costs will grow as well. However, we expect the growth to be slower than overall revenue growth due to economies of scale, better vendor agreements, and mix of testing.

Operating and Other Expenses

Selling, general and administrative expenses. Expenses for the three months ended March 31, 2008 increased approximately $2.9 million, or 42%, to $9.9 million compared to $7.0 million for the three months ended March 31, 2007. As a percentage of revenues, these costs decreased from 80% for the three months ended March 31, 2007 to 63% for the three months ended March 31, 2008. The increase in expenses in 2008 was due primarily to expenses incurred to generate and

support revenue growth and to improve infrastructure, including selling and marketing expenses, billing and collection costs, and bad debt expenses. In addition, we have increased headcount and consulting resources in information technology to support our expanded offerings and for future revenue growth. In 2008, we also incurred higher professional fees. We anticipate selling expenses and bad debt expenses will continue to grow as a result of our expected revenue growth, though we expect other general and administrative expenses to decline as a percentage of revenues as our infrastructure costs stabilize.

Interest expense and other income. Interest expense and other income totaled $0.8 million for the three months ended March 31, 2008 and 2007 and consisted primarily of net interest expense. Interest expense relates to borrowings under our financing facilities as well as the amortization of costs relating to warrants issued to Safeguard, our majority stockholder, in partial consideration for the guarantee of our credit facility with Comerica Bank by Safeguard and in connection with the establishment and borrowings under the Initial Mezzanine Facility and New Mezzanine Facility. Amortized costs of $0.2 and $0.3 million related to these warrants was included in interest expense for the three months ended March 31, 2008 and 2007, respectively. The amortized costs for the three months ended March 31, 2007 represent one time warrant costs fully expensed during the quarter.

Liquidity and Capital Resources

At March 31, 2008, we had approximately $3.1 million of cash and cash equivalents and $8.6 million available under the New Mezzanine Facility with Safeguard. However, we had a working capital deficiency of $10.3 million at March 31, 2008. Cash used in operating activities was $190,000 for the three months ended March 31, 2008 due primarily to our net loss of $934,000, and an increase in accounts receivable of $3.2 million, substantially offset by non-cash costs and expenses of $2.6 million for depreciation, stock-based compensation and bad debt, and an increase in accounts payable of $1.0 million. The operating cash improvement of $5.6 million between the first quarter of 2008 and the first quarter of 2007 is primarily the result of the negative cash flow related to Discontinued Operations of $6.2 million, which occurred during the first quarter of 2007 as well as higher bad debt expense in 2008 and fluctuations in accounts receivable and accounts payable. Cash used in investing activities for the three months ended March 31, 2008 of $1.5 million consisted of capital expenditures related primarily to new laboratory equipment and information technology infrastructure enhancements. The reduction in cash from investing activities of $11.2 million between the first quarter of 2008 and the first quarter of 2007 is primarily the result of proceeds from the sale of Discontinued Operations of $10.4 million, which occurred during the first quarter of 2007. Net cash provided by financing activities for the three months ended March 31, 2008 was $3.4 million and was attributable primarily to net borrowings of $21.0 million under our revolving line of credit and New Mezzanine Facility, which were partially offset by principal payments of $18.0 million on our revolving lines of credit and capital leases. See Note 8 "Lines of Credit" for discussion of the changes in Mezzanine financing.

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